FIN 534 Week 5 Homework Assignment Chapter 8
1. An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
a. Put
b. Naked
c. Covered
d. Out-of-the-money
e. In-the-money
2. Cazden Motors stock is trading at $30 a share. Call options on the companys stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?
a. The options with the $25 strike price will sell for less than the options with the $35 strike price.
b. The options with the $25 strike price have an exercise value greater than $5.
c. The options with the $35 strike price have an exercise value greater than $0.
d. If Cazdens stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
e. The options with the $25 strike price will sell for $5.
3. Braddock Construction Co.s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?
a. The price of the call option will increase by more than $2.
b. The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
c. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
d. The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
e. The price of the call option will increase by $2.
4. Which of the following statements is CORRECT?
a. Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
b. Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
c. Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
d. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
e. If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
5. Which of the following statements is CORRECT?
a. Call options generally sell at a price less than their exercise value.
b. If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
c. Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
d. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
e. If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stocks price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit